Financial Statement Analysis Exam #1

What is a current asset?

An asset that is used up or converted to cash within one year

What is a current liability?

Requires payment within one year

Working Capital

Current assets - Current liabilities

Common Size Balance Sheet

Each item is recast as percent of total assets

Operating expense margin

Operating expense / sales

Common size income statement

Express each line item as a percentage of total revenue

Which kind of cash flow is the “lifeblood” of a company?

Operating cash flow

What is fset?

Financial Statement Effects Template. Explains how each transaction effects the different financial statements.

What is a 10-K?

Annual/Quarterly financial report

What is an 8-K?

Wide range of Corporate events (like new CEO, change in CPA firm)

What is a Schedule I?

Condensed information about financial statements

What is schedule II?

Valuation and qualifying accounts (ex. bad debt and inventory estimates)

What is return on equity?

net income / average stockholder’s equity

what is financial leverage?

Average total assets / average stockholder’s equity

What is the disaggregation of ROE?

ROA * FL * NCIR

What is noncontrolling interest ratio?

(net income attrib to common shareholders / NI) / (average equity attrib to common shareholders / avg total equity)

What are the two ways a company can improve ROA?

1. Improve profit margin

2. Improve asset turnover (sales / assets)

What is net operating profit after taxes?

Net operating profit before taxes - tax on operating profit

What is return on net operating assets?

Net operating profit after tax / Average net operating assets

What is Net Operating Assets?

Operating assets net operating liabilities

Nonoperating Return

Financial Leverage * Spread

Revolving Credit Line

Cash available for seasonal shortfalls, bank commits to credit line maximum

Line of credit

Bank guarantees funds will be available when needed

Term loans

Used to fund PP&E with loan term matching PP&E life and asset used as collateral

Formula for expected credit loss

Chance of default * Loss given default

What are the relevant macroeconomic conditions that impact loan issuance?

1. Industry competition

2. Bargaining power of buyers

3. Bargaining power of suppliers

4. Threat of substitution

5. Threat of entry

How do creditors minimize loss during default?

Credit limits, collateral, repayment terms, convenants

Credit Limit

The maximum a customer can owe at a given time

Convenants

Restrict customers behavior, including limiting mergers, submitting financial statements, maintain certain ratios

Capital structure

The specific mix of debt and equity a company uses to finance its obligations

Times interest earned ratio

Earnings before interest and tax / interest expense

Cash flows from operations to total debt

cash from operations / (short term + long term debt)

Free operating cash flow to debt

operating cash flow after cap ex / (short + long term debt)

Current ratio

Current assets / current liabilities

Quick Ratio

(Cash + Marketable Securities + a/r) / Current Liabilities

What are the three types of input that determine credit rating?

Macroeconomic statistics, Industry Data, company-specific information

Altman’s Z Model

Combines working capital / total assets, RE / total assets, EBIT / total assets, Market value of equity / total liabilities, Sales / total assets to assess bankruptcy risk